INDEPENDENT

The article is focused on the analysis of work of French historian Jules Michelet intitled Democratic Legends of the North and the polemical answer given by Russian philosopher and essayist Alexander Herzen. Michelet’s work is political pamphlet describing in biased way the repression of Polish uprising of 1830–31 by the Russian government. His analysis is not limited by the scrutiny of the geopolitical rapport des forces in XIX century Europe but tends to represent Russia as some sort of pathology in comparison to the process of nationbuilding. Although in his response Herzen acknowledges the reactionary role of Nikolai I political regime in Europe, he fiercely rejects the idea of moral and cultural backwardness of Russian civilization. He presents the eminently forming democratic tradition in Russia focusing on its radical and socialist character that could potentially make it far superior in comparison to the bourgeois “half-freedoms” officially allowed Europe. Herzen makes a particular emphasis on Russian rural community that maintains its “natural communist” tendencies and thus “survived till the formation of socialism in Europe”. In the last part of the article the parallels between Herzen’s anarchist communism and some poststructuralist political theories are established. In the work of Pierre Clastres, Gilles Deleuze and Felix Guattari, David Graeber and Eduardo Viveiros de Castro one may found the ideas about the potential of 34 [ИССЛЕДОВАНИЯ] ЕВГЕНИЙ БЛИНОВ [2023 resistance to the disciplinary techniques of power and related state forms contained in many primitive and nomadic societies.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District of Columbia Lottery and Charitable Games Control Board's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the financial statements present only the District of Columbia Lottery and Charitable Games Control Board and do not purport to, and do not, present fairly the financial position of the Government of the District of Columbia as of September 30, 2012 and 2011, and the changes in its financial position, or where applicable, its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the District of Columbia Lottery and Charitable Games Control Board, as of September 30,2012 and 2011, and the changes in financial position and cash flows thereof for the years then ended in conformity with accounting principles generally accepted in the United States of America.
In accordance with Government Auditing Standards, we have also issued a report dated January 28,2013 on our consideration of District of Columbia Lottery and Charitable Games Control Board's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audits.
Management's Discussion and Analysis, on pages 3 through 14, is not a required part of the basic financial statements, but is supplementary information required by u.s. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

GOVERNMENT OF THE DISTRICT OF COLUMBIA LOTTERY AND CHARITABLE GAMES CONTROL BOARD
MANAGEMENT'S DISCUSSION AND ANALYSIS SEPTEMBER 30, 2012 and 2011

(Dollar Amounts in Thousands)
-3 - The discussion and analysis of the D.C. Lottery and Charitable Games Control Board's (the Lottery) financial performance provides an overview of its financial activities for the fiscal years ended September 30, 2012September 30, , 2011September 30, and 2010. This discussion and analysis should be read in conjunction with the attached financial statements.

Background and Other Significant Information
The Lottery was established by Public Law 3-172 as an independent agency of the Government of the District of Columbia (District). In accordance with law, the Lottery is responsible for generating revenues through the sale of lottery products and is required to remit monthly gaming revenues less prizes, operating expenses and a reserve not to exceed 2% of annual prize payments to the General Fund of the District.
The Lottery's financial transactions are accounted for as an enterprise fund in the District's basic financial statements.

Financial Highlights
Gross revenues from lottery gaming activities increased by $17,926 or 7.74% over the prior year amount. The Agency generated ticket sales of $249,632 for an aggregate increase of $18,174 or 7.85% more than the prior year total of $231,458. Total operating expenses increased by $13,659 or 8.06% primarily the result of higher prize payouts, higher agents' commission and advertising costs offset by reduction in contractor fees. The prize payouts in 2012 increased by $11,453 or 9.1% compared to 2011 and reflected a payout rate of 55.0% of ticket sales versus 51.34% the prior year. The contractor's fee reduced by $487 or 4.32% over prior year Transfers to the District's General Fund increased by $4,229 equivalent to 6.80% over the prior year's total.
To effectively understand the Lottery's operations and to assess its financial activities, the reader must be aware of individual game sales, related prize expenses and payout percentages, the impact on change in net assets and resulting transfer to the District's General Fund. Prize payouts and the volume of Powerball and Mega Millions sales have the most dramatic impact on transfer levels but are beyond the control of management.

Using This Financial Report
This financial report consists of a series of financial statements, prepared in accordance with GASB Statement No. 34, Governments. These statements focus on the financial condition, the results of operations, and cash flows of the Lottery as a whole.
One of the most important questions asked about the Lottery's finances is whether or not they have improved as a result of the year's activities. The key to understanding this core question is the Statement of Net Assets; the Statement of Revenues, Expenses, and Changes in Net Assets; and the Statement of Cash Flows. These statements present financial information in a form that is similar to that used by commercial entities.

GOVERNMENT OF THE DISTRICT OF COLUMBIA LOTTERY AND CHARITABLE GAMES CONTROL BOARD MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
SEPTEMBER 30, 2012 and 2011

(Dollar Amounts in Thousands)
-4 -The Lottery's net assets (the difference between assets and liabilities) are an indicator of the improvement or erosion of financial health. The Statement of Net Assets include all assets and liabilities. It is prepared under the economic resources measurement focus and the accrual basis of accounting, whereby revenues are recognized when earned and expenses are recognized when the related liability is incurred.
The Statement of Revenues, Expenses and Changes in Net Assets present the revenues earned and the expenses incurred during each year. Activities are reported as either operating or non-operating. Another important factor to consider when evaluating financial viability is the Lottery's ability to meet financial obligations as they come due. The Statement of Cash Flows present information related to cash inflows and outflows summarized by operating, capital and non-capital financing and investing activities.

Financial Analysis
The Lottery's net assets increased by $108, $68, and $41 for the years ended September 30, 2012, 2011 and 2010, respectively. The following is a summary of the Lottery's financial information as of and for the years ended September 30, 2012, 2011, and 2010.    The increase in ticket sales and decrease in prizes and other operating costs account for the increment in transfer amount. The DC Four game was responsible for 26.32% of total gaming revenue and 37.3% of the overall gross margin. The 1.9% decrease in gaming revenue contribution rate and 1.56% increase in gross margin contribution percentages from over the prior year amounts can be directly associated to higher ticket sales and lower prizes and fairly higher agents/retailer commissions.

GOVERNMENT OF THE DISTRICT OF COLUMBIA LOTTERY AND CHARITABLE GAMES CONTROL BOARD MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
SEPTEMBER 30, 2012 and 2011

(Dollar Amounts in Thousands)
-8 -In 2011, prizes in totaled $32,711 representing a $4,148 or 14.52% increase over the $28,563 paid out in 2010. Other operating costs decreased $1,382 from the prior year's total primarily due to decreased gaming contractor fees, advertising expense, and other direct and administrative cost allocations to the game. Transfers to the District's General Fund totaled $21,615 for a $6,010 or 21.76% decrease from the $27,625 transferred in 2010. The decrease in ticket sales and increase in prizes and other operating costs account for the decline in transfer amount. The DC Four game was responsible for 28.21% of total gaming revenue and 38.86% of the overall gross margin. The 1.6% decrease in gaming revenue contribution rate and 7.07% decline in gross margin contribution percentages from prior year amounts can be directly associated to lower ticket sales and higher prizes and agents/retailer commissions.

DC FIVE
DC Five is a daily five-digit game with a fixed payout. Players may wager 50 cents or one dollar for a chance to win thirteen different ways. Players select a number within the range 00000 to 99999. Tickets may be purchased for the next draw or up to seven consecutive draws for the mid-day and nightly drawings. Players also have the option for advance day play. This feature allows a player to place a bet for a specific day in the future. The DC Five game was launched effective July 19, 2009.
In 2012, Ticket sales totaled $15,098 which represents a $2,221 or 17.25% increase over the prior year total of $12,877. Prizes and agents/retailer commissions in 2012 amounted to $8,179. The game generated $5,189 in transfer to the District's General Fund in 2012 or $401 lesser than the $5,590 produced in 2011. The increase in ticket sales offset by a net increase in operating expenses over prior year totals essentially accounts for the decrease in transfer.
Ticket sales totaled $12,877 in 2011 and represented a $1,485 or 13.04% increase over the prior year total of $11,392. Prizes and agents/retailer commissions amounted to $5,905. The game generated $5,590 in transfer to the District's General Fund in 2011 or $1,265 more than the $4,325 produced in 2010. The increase in ticket sales offset by a net increase in operating expenses over prior year totals essentially accounts for the increase in transfer.

POWERBALL
The Powerball game is a five out of fifty-nine plus one out of thirty-nine online lottery game that pays a grand prize on an annuitized pari-mutuel basis or as a cash lump sum payment and all other prizes on a fixed basis. All annuitized prizes are paid in thirty annual graduated installments. The Powerball game is sponsored by the Multi-State Lottery Association (MUSL), a conglomerate of thirty states, the District of Columbia and Virgin Islands, that combines resources and sales to offer larger jackpots. Party lotteries pool their sales and other resources, but otherwise account for operations separately. The latest prize structure matrix change to the game was January 4, 2009.
Powerball sales totaled $17,136 in 2012 representing a $3,213 or 23.08% increase over the $13,923 generated in 2011. The Multi-State Lottery Association and Mega Millions conglomerates agreed to allow respective member states to cross sell tickets in January 2010. The increment in ticket sales can be attributed to the number of higher jackpots that increased player participation and sales volume. Powerball sales are jackpot driven and high jackpots impact sales levels. Prizes amounted to $7,927 in 2012 representing a $1,378 or 21.05% increase over the $6,548 expensed in 2011. Powerball prizes are

GOVERNMENT OF THE DISTRICT OF COLUMBIA LOTTERY AND CHARITABLE GAMES CONTROL BOARD MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
SEPTEMBER 30, 2012 and 2011

(Dollar Amounts in Thousands)
-9 -expensed at the rate of 50.0% of sales intake offset by lapsed prizes. Prize expense increased due to higher sales intake in 2012 and was reduced by lapsed prizes totaling $432. Operating expenses excluding prizes increased by $19.62. This is primarily due to higher contractor gaming fees, advertising expense, other direct and administrative cost allocations. The increase in ticket sales offset by lower operating costs accounts for the $1,501 increment in transfer to the District's General Fund to $6,576 from the $5,075 transferred in 2011.
Powerball sales totaled $13,923 in 2011 representing a $6,252 or 30.99% decrease from the $20,175 generated in 2010. The Multi-State Lottery Association and Mega Millions conglomerates agreed to allow respective member states to cross sell tickets in January 2010. The decrease in ticket sales can be attributed to the offset of ticket sales to the Mega Millions game for one full year, lost sales to surrounding jurisdictions, and the game's continual inability to generate jackpots to levels necessary to increase player participation and sales volume. Powerball sales are jackpot driven and high jackpots impact sales levels.
Prizes amounted to $6,548 in 2011 representing a $2,773 or 29.75% decrease from the $9,321 expensed in 2010. Powerball prizes are expensed at the rate of 50.0% of sales intake offset by lapsed prizes. Prize expense decreased proportionate to sales intake in 2011 and was further reduced by lapsed prizes totaling $456. Operating expenses excluding prizes decreased $1,661 primarily due to lower contractor gaming fees, advertising expense, other direct and administrative cost allocations. Other income charged to the game decreased $139. The decrease in ticket sales and other income offset by lower operating costs accounts for the $1,950 reduction in transfer to the District's General Fund to $5,075 from the $7,025 transferred in 2010.

MEGA MILLIONS
The Mega Millions game is a five out of fifty-six plus one out of forty-six online lottery game that pays a grand prize or a cash lump sum payment and all other prizes on a fixed basis. All annuity prizes are paid in twenty-six annual installments. Some states offer a megaplier feature to increase non-jackpot prizes by 2, 3, or 4 times. The Mega Millions game is sponsored by the Mega Millions Group, a conglomerate of twelve states, and participating MUSL members that combine resources and sales to offer larger jackpots. All

GOVERNMENT OF THE DISTRICT OF COLUMBIA LOTTERY AND CHARITABLE GAMES CONTROL BOARD MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
SEPTEMBER 30, 2012 and 2011

(Dollar Amounts in Thousands)
-10 -Mega Millions sales more than doubled to $8,685 during its first full year of operation in 2011 compared to the $4,313 generated over eight months in 2010. Prizes expense amounted to $4,480 and $2,230 respectively, in 2011 and 2010. Mega Millions prizes were expensed at rates ranging from 50.0% to 52.5% of regular and megaplier sales through June 28, 2011. Prizes were expensed at the rate of 51.5% of overall ticket sales for the remainder of the fiscal year. Ticket sales offset by overall operating costs resulted in a transfer to the District's General Fund of $2,585 in 2011 or $1,385 more than the $1,200 produced in 2010.

KENO
Keno is a 10/20/80 game with fixed prizes. Players choose to play from 1 to 10 spots, with each spot having a different prize structure. Players select twenty numbers from a field of 80 numbers. Draws are held every four minutes during valid game times. Payouts range from five dollars to 100,000 dollars. Tier 1 prizes start as a fixed payout and transitions to a pari-mutuel payout when the number of winners per draw exceeds 10. The game is supplemented by Keno Spin which features a multiplier option to the game's prizes. The Keno game continues to be impacted by the changing demographics in the District of Columbia, inability to add new social settings and the economy. The Keno game is offered at all agent/retailers locations and experienced some cannibalization to Lottery's new Race 2 Riches game. The game continues to be marketed through targeted awareness and promotional campaigns.

HOT LOTTO
Hot Lotto is a five out of thirty-nine plus one out of nineteen online lottery game that pays a grand prize, at the election of the player at time of ticket purchase, either on an annuitized pari-mutuel or cash option basis. All other prizes are paid on a fixed basis. Prizes are expensed at the rate of 50.0% of sales intake less lapsed prizes. The Hot Lotto game is sponsored by the Multi-State Lottery Association (MUSL), a conglomerate of thirteen states and the District of Columbia, which combines resources and sales to offer larger jackpots. The initial jackpot starts at $1 million and drawings are held every Wednesday and Saturday. Party lotteries pool their sales and other resources, but otherwise account for operations separately.

DC DAILY SIX
The DC Daily Six game is a six out of thirty-nine numbers online lotto type game that pays fixed prize payouts ranging from one dollar to 250,000 dollars. Players receive two boards (set of six numbers) for one dollar. Drawings are held nightly seven days a week and players can purchase tickets for the next draw only or the next draw and up to 42 consecutive drawings in predetermined increments. The Division 1 prize payout is fixed for the first four winners. If the number of winners exceeds four then all Division 1 winners share the maximum payout of $1 million. Payouts for Divisions 2 through 6 are fixed.

RACE 2 RICHES
Race 2 Riches is an interactive horseracing game with the opportunity to win up to $1,000. Drawings or races are held every four minutes seven days a week during regular operating hours. The Race 2 Riches game was launched effective November 23, 2010.

DC ROLLING CASH FIVE
The DC Rolling Cash Five game is a five out of thirty-five numbers online lotto type game that pays fixed prize payouts ranging from one dollar to generated jackpot amount. Player received one wager (set of five numbers) for the sum of one dollar. Drawings are held nightly seven days a week and players can purchase tickets for the next draw only or the next draw and up to 42 consecutive drawings in predetermined increments. Division 1 grand prize winnings are para-mutual and varied depending on number of players and winners. Prize payouts for Divisions 2 through Division 4 winners are fixed. Lottery management decided to discontinue the game effective July 18, 2009 due to declining ticket sales year over year.
There were no ticket sales in 2012, 2011 and 2010. The transfer to the District's General Fund totaling $255 in 2010 was the result of lapsed prizes and associated reduction in agents/retailer commissions.

DC RAFFLE
The DC Raffle game is a promotional game designed to run for certain intervals of time and to generate a maximum number of tickets to be sold. Tickets are printed in sequential numbers order which serves as the bet. Each player wagers a set sum for a ticket and chance to win fixed prizes.
There were no raffle sales in 2012 and 2011. A small promotional campaign was launched in 2010 resulting in minimal ticket sales of $39. Operating costs totaling $121 consisting primarily of prizes and agents/retailer commissions, gaming fees, and advertising costs resulted in a net operating loss of $82.

GOVERNMENT OF THE DISTRICT OF COLUMBIA LOTTERY AND CHARITABLE GAMES CONTROL BOARD MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
SEPTEMBER 30, 2012 and 2011

INSTANT TICKETS
Instant or scratch games are designed to allow a player the opportunity to determine if he/she is an instant winner at the time of ticket purchase. The price of tickets and prize structure are determined before the production of tickets. Instant ticket sales amounted to $59,940 in 2012 representing a $3,834 or 6.83% increase over 2011 sales of $56,106. The Lottery has been able to stimulate sales through a combination of offering higher price point games, designing games with higher prize payouts to increase winning opportunities for players, and providing a full complement of available tickets at all agent locations. The prize payout rate averaged 66.18% and 66.99% as a percentage of tickets sold in 2012 and 2011, respectively.

INTEREST, DIVIDENDS AND OTHER INCOME
All idle cash of the Lottery is invested through the District's General Fund Pooled Investments Account.
Powerball receipts transferred to MUSL to fund major jackpots are invested in securities prior to jackpots being hit and earnings are allocated annually to party lotteries. Interest and dividend income, shown separately in the financial statements, has increased by $2, and decreased by $

Charitable Gaming Activities
The Lottery also oversees charitable gaming activities to include the licensing and regulation of charitable and other not-for-profit organizations conducting bingo, raffles, and other fund-raising activities within the District of Columbia. The mission of the Lottery with respect to charitable gaming is to insure that only qualified organizations are licensed to conduct fund-raising activities and that they are carried out in accordance with existing laws, rules and regulations. Revenues generated through the issuance of licenses, processing fees, etc. are not intended to cover costs associated with overseeing program activities.  The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these financial statements.

GOVERNMENT OF THE DISTRICT OF COLUMBIA LOTTERY AND CHARITABLE GAMES CONTROL BOARD
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2012 and 2011

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Organization
The Lottery and Charitable Games Control Board (the Lottery) was established by Public Law 3-172 as an independent agency of the Government of the District of Columbia (District). In accordance with the law, the Lottery must remit its monthly gaming revenues, less prizes, operating expenses and a reserve not to exceed 2% of projected annual prize payments to the General Fund of the District.

(b) Measurement Focus
The Lottery's basic financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. The economic measurement focus reports all assets and liabilities associated with the operations and are included on the Statements of Net Assets.

(d) Basis of Presentation
The Lottery's financial transactions are accounted for as an enterprise fund in the District's financial statements. The accompanying financial statements are only those of the Lottery and are not intended to present the financial position, changes in financial position, and cash flows of the District taken as a whole. The District provides certain legal, central accounting and other services to the Lottery. The costs and revenue associated with these services are not reflected in these financial statements.

(e) Cash and Cash Equivalents
The Lottery participates in the District's pooled cash program whereby cash that is not needed for immediate disbursement is pooled with that of the District and used to purchase current investments. In accordance with the law, the District may invest the pooled cash directly in, or through repurchase agreements, obligations of the United States or its agencies, which are fully guaranteed by the federal government, and in certificates of deposit, which are issued by federally insured banks. In accordance with District policies, substantially all deposits in the pooled cash program were insured or collateralized with securities held by the District or its agent in the District's name. Interest income from the investment of pooled cash is allocated to the Lottery based on the amount the Lottery invests in the pool. The Lottery considers the pooled cash to be cash equivalents for the purpose of cash flows because the pool may not hold the securities for more than 91 days. Cash and cash equivalents at September 30, 2012 and 2011 respectively, were $8,007 and $9,982.

(f) Investments
Investments in U.S. government and agency securities are recorded at market value which approximates fair value.

(g) Revenue and Accounts Receivable Recognition
Revenue for the traditional lottery is recognized when tickets are sold to the public. Revenue and accounts receivable from the Lottery's contractors are recognized when sales reports are received.

(h) Allowance for Uncollectible Accounts
The Lottery establishes an allowance for uncollectible accounts for all accounts receivable over 180 days old.

(i) Unclaimed Prizes
Prizes must be claimed within 180 days year following the drawing date for each game. Prizes unclaimed beyond this period are forfeited by the ticket holder. Total prizes lapsed amounted to $3,800 for the fiscal year 2012. These forfeited prizes are netted against prize expense in the Statement of Revenues, Expenses and Changes in Net Assets.

(j) Capital Assets
Capital assets are recorded at cost. The cost of major remodeling, betterments, and improvements of $5 and greater are capitalized. Repairs and maintenance costs are expensed as incurred. When capital assets are retired or sold, the cost and related accumulated depreciation are removed from the appropriate property and equipment accounts, and resulting gains or losses are recorded.
Amortization and depreciation expense are calculated using the straight-line method over the following estimated useful lives:

Category Estimated
Useful Life Machinery and Equipment 5-8 years Office Furniture and Fixtures 5-8 years Leasehold Improvements 5-15 years

(k) Gaming Revenue
Gaming revenue consists of ticket sales and other related revenue including dividends and interest income, penalties assessed on delinquent agents' accounts, and charitable gaming fees. Revenue from online tickets is recorded as gaming revenue when the drawings are held. Online tickets sold in advance are recorded as deferred revenue until the drawings are held. Revenue is recorded when an online ticket is sold if the sale is not associated with a subsequent drawing. Revenue from instant tickets is recorded as gaming revenue when related packs are activated.

(l) Games and Prizes
The

(m) Prize Expense
Instant tickets prize expense is based on the prize payout percentage for each instant lottery game and is accrued as the related gaming revenue is earned. Prize expenses for online games, excluding the Powerball, Hot Lotto, Mega Millions, Fast Play, and DC Rolling Cash 5 games, are accrued based on the draw liability associated with drawings for the specific games. Powerball and Hot Lotto prize expenses are recorded at the rate of 50.0% of ticket sales. Mega Millions prize expenses recorded at rates ranging from 50.0% to 52.50% of regular and MegaPlier sales. Fast Play prize expenses are recorded when applicable winning tickets are sold. The accrued prize liability represents a payable for prize amounts that have not been claimed as of each fiscal year-end. Prize expense for all games is reduced by the sum of lapsed prizes not claimed during the required period of one year from the sales draw date for online games and the respective game closing date for instant games.

(n) Compensated Absences
The Lottery permits employees to accumulate earned but unused vacation and sick pay benefits depending on the employee's length of service. Employees may not accumulate more than 240 hours of vacation benefits. The Lottery accrues for accumulated vacation as the benefits are earned by employees.
There is not a maximum limitation on the amount of unused sick pay benefits that employees may accumulate. The Lottery does not accrue for non-vesting accumulating rights to receive sick pay benefits. Lottery employees participating in the Federal Civil Service Retirement System program may convert sick pay benefits to additional service time at the rate of one month for every 176 hours of sick leave not used at point of retirement.

(o) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 4 MULTI-STATE LOTTERY ASSOCIATION (a) Background
The Lottery is a member of the Multi-State Lottery Association (MUSL). MUSL has thirty-three (33) members and administers multi-state lottery games. Powerball was initiated on April 20, 1992 and is a semi-weekly pari-mutuel drawing with a minimum grand prize of $20,000. MUSL previously administered the Lotto-America game, which was terminated on April 18, 1992. Hot Lotto was implemented on April 5, 2004 and is a semi-weekly pari-mutuel drawing with a minimum grand prize of $1,000. All MUSL members remit a portion of their Powerball and Hot Lotto revenue to MUSL for the prize payments and administrative expenses of the respective game.

(b) Restricted Investments and Obligations for Unpaid Prizes
Lotto-America and Powerball jackpot prizes are payable to winners in annual installments over 20 to 25 years. The Lottery is responsible for sending the annual payments to Lotto-America and Powerball winners who purchased their winning tickets from the Lottery. MUSL is responsible for providing the Lottery cash to fund these installment payments.
As of September 30, 2012 and 2011, MUSL had purchased for the Lottery, U.S. government securities aggregating $16,764 and $23,653 respectively to fund future installment payments for the Lottery's Lotto-America and Powerball winners.
The market value of these securities was $16,381 and $22,912 as of September 30, 2012 and 2011, respectively. The investments provide the Lottery cash payments corresponding to the Lottery's obligations to send the annual installments to the prize winners. The Lottery has reflected the market value of the securities as restricted investments and as corresponding obligations for unpaid prizes on the statements of net assets. All restricted investments are insured and registered or are held by the Lottery or its agent in the Lottery's name.
As of September 30, 2012, the Lottery had the following investments and maturities: These investments are obligations explicitly guaranteed by the U.S. government and are held for prize annuities based on quoted market prices. The fair value of the liabilities is based on current interest rates of the related U.S. government security held to fund annuity obligations. MUSL's investment policy limits its exposure to credit risk by investing only in securities that are backed by the full faith and credit of the U.S. government or its agencies.
As of September 30, 2012, the Lottery had an interest in a SEC 2a7 pooled government cash management fund of $1,058 and the pool was not rated.
The prize pool for Powerball consists of 50% of each drawing period's sales. Two percent of the prize pool is placed in a prize reserve fund and a set prize reserve fund. These reserve funds serve as contingency funds to protect MUSL from unforeseen liabilities. As of September 30, 2012 and 2011, the total Powerball prize reserve fund was approximately $95,747 and $99,216, respectively, of which the Lottery's share was approximately $693 and $785, respectively. In addition, the total Powerball set prize reserve fund as of September 30, 2012 and 2011 was approximately $30,734 and $25,000, respectively, of which the Lottery's share was approximately $266 and $174, respectively.
The balance remaining in the reserve funds are refundable to MUSL members if a member leaves or if MUSL disbands. If a member leaves, the member must wait one year before their portion of the prize reserve funds is returned. The balance in the reserve funds may be used at the discretion of MUSL's Board of Directors. Accordingly, the Lottery's share of the reserve funds is not reflected in the accompanying financial statements.
The prize pool for Hot Lotto consists of 50% of each drawing period's sales. The 50% contribution to the prize pool is distributed to grand prizes and a prize reserve fund based on the following jackpot levels: $1,000,000 to $2,000,000 52.5763% to grand prize $2,000,000 to $5,000,000 52.5763% to grand prize plus 1.00% to prize reserve fund $5,000,000 to 10,000,000 52.5763% to grand prize plus 3.00% to prize reserve fund The prize reserve fund serves as a contingency fund to protect MUSL from unforeseen liabilities. As of September 30, 2012, the total Hot Lotto prize reserve fund was approximately $7,383 of which the Lottery's share was approximately $314. The balance in the prize reserve fund may be used at the discretion of the MUSL's Board of Directors. The Lottery's share of the prize reserve fund is not reflected in the accompanying financial statements.

NOTE 5 OBLIGATIONS FOR UNPAID PRIZES
Powerball jackpot prizes are paid in 20 or 25 year installments. The first installment is paid approximately two weeks after the prize is claimed. The subsequent annual payments are funded with U.S. Treasury Strips purchased by MUSL for the Lottery. Jackpot prize payables represent the future annual prize payments valued at cost plus accrued interest (present value of securities held to maturity) of the investment securities funding the payments. The unamortized discount on the prizes payable is based on interest rates which range from 0.317% to 2.357% and reflect the interest rates earned by the investments held to fund the related liabilities.

Jackpot
The aggregate amount of prizes payable due in each of the five years following September 30, 2012, and the five year incremental totals thereafter, is as follows:

NOTE 7 TRANSFERS TO THE DISTRICT'S GENERAL FUND
The District Budget Act (PL 4-162) (the Act) of 1983 requires the Lottery to transfer its revenues less expenses and less a reserve not to exceed 2% of annual prize payments to the General Fund of the District. The Mayor may approve a change in the reserve limit, as necessary, upon the request of the Lottery. During the fiscal years ended September 30, 2012 and 2011, the Lottery's net transfers to the General Fund of the District were $66,404 and $62,175 respectively. The Lottery was in compliance with the Act for the fiscal years ended September 30, 2012 and 2011.

NOTE 8 LONG-TERM LIABILITIES
The following summarizes long-term liabilities at September 30, 2012: Contributions and earnings vest fully after four years of service following a one-year waiting period.
Contributions and earnings are forfeited if separation occurs before five years of credited service. These contributions are not considered assets of the Lottery or the District, which have no further liability to this plan.

(c) Deferred Compensation Plan
Lottery employees are eligible to participate in the District-sponsored deferred compensation plan (D.C. Code 47-3601) created in accordance with Internal Revenue Code Section 457. Employees may defer an amount equal to the lesser of 100% of includible compensation or $16.5 in 2011. Maximum annual contribution amounts are determined and set by the Internal Revenue Service (IRS). Compensation deferred and income earned is taxable when paid or made available to the participant or beneficiary upon retirement, death, termination, or unforeseeable emergency. Contributions are not assets of the Lottery or District, which have no further liability to the plan.

NOTE 10 COMMITMENTS AND CONTINGENCIES (a) Operating Leases
The Lottery leased certain facilities under a ten (10)

(b) Annuity Contracts
The winner of a $1.0 million DC Black instant ticket was awarded an annuity prize payable in annual installments over 20 years, with the first payment being made by the Lottery. The Lottery has entered into an agreement with an insurance company under which the Lottery purchased an annuity under contract that provides payments corresponding to its obligations to the prize winner. It is the intent of the Lottery that future installment payments will be made directly to the winner by the insurance company, thus neither the present value of the annuity nor the present value of related future payments are reflected in the accompanying financial statements. The Lottery will be liable for such future payments if the insurance company should default on payments.

(c) Risk of Loss
The Lottery is exposed to various risks of loss related to torts; theft of, damage to, or destruction of assets; errors and omissions; injuries to employees; and natural disasters. The Lottery or District covers all of the Lottery's claim settlements and judgments out of the Lottery revenues or the District's General Fund resources.

NOTE 11 RELATED PARTY TRANSACTIONS
During 2011, The Lottery had related party transactions with the Office of the Chief Financial Officer (OCFO) to provide financial and managerial oversight. These services included, but were not limited to, internal audit and internal security, legal, human resources, procurement, financial management, and executive management oversight services. The annual contractual cost for these services was $1,147 and $1,123 in fiscal years 2012 and 2011, respectively.
Other services provided by District Government entities to the Lottery include central processing of payroll, accounting, computer technology services, and the handling of intra-district transactions for rent, telephone, security guard services, etc. Personnel costs for these services are budgeted and accounted for as part of the respective entity's regular operations.

NOTE 12 LITIGATION
The Lottery is a defendant in a lawsuit brought by a former employee, alleging retaliation on the basis of protected speech, failure to due process before termination, and intentional infliction of emotional distress. The District Court ruled in favor of the Lottery. The Plaintiff appealed the case to the U.S. Court of Appeals. The appellate court affirmed the dismissal of all counts except for the due process claim, which was remanded to the District Court. The Lottery intends to defend this litigation and cannot, at this time, reasonably predict the outcome of the proceedings or sanctions, if any, that will be imposed.
While the ultimate outcome of unsolved lawsuits cannot be predicted at the time, it is the opinion of management and in-house counsel that the disposition of any litigation in which the Lottery is involved will not have a material adverse effect on the financial position, results of operations, or cash flows of the Lottery.

NOTE 13 SUBSEQUENT EVENTS
Lottery did not have any subsequent events that based on the facts and circumstances, required recording or disclosure in the financial statements for the year ended September 30, 2012. Events and transactions were evaluated through January 28, 2013, the date the financial statements were available to be issued. We have audited the financial statements of the Lottery and Charitable Games Control Board (the Lottery) an enterprise fund of the Government of the District of Columbia (District), as of and for the year ended September 30,2012, and have issued our report thereon dated January 28,2013. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.

Internal Control over Financial Reporting
Management of the Lottery is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the Lottery's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purposes of expressing an opinion on the effectiveness of the Lottery's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Lottery's internal control over financial reporting.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement ofthe entity's financial statements will not be prevented, or detected and corrected on a timely basis.
Our consideration of the internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined previously. However, we identified certain deficiencies in internal control over financial reporting, described in the accompanying schedule of findings and responses that we considered to be significant deficiencies in internal control over financial reporting (2012-1 and 2012-2). A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that reported is less severe than a material weakness, yet important enough to merit attention by those charged with governance. As part of obtaining reasonable assurance about whether the Lottery's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.
We noted another matter that we reported to management of the Lottery in a separate letter dated January 28,2013.
The Lottery's response to the finding identified in our audit is described in the accompanying schedule of findings and responses. We did not audit the Lottery's response and, accordingly, we express no opinion on it.
This report is intended solely for the information and use of the Mayor, the Council, and the Inspector General of the Government of the District of Columbia and management of the Lottery and is not intended to be, and should not be used by anyone other than these specified parties.~~~f t°W ashington, D.C. January 28,2013

Condition:
The DC Lottery accounting personnel did not have the requisite expertise necessary to prepare the fiscal year 2012 financial statements of the organization. As a result, the Agency had to rely on the assistance of the Office of Financial Operations and Systems and an external contractor, who has institutional knowledge and experience in preparing the agency's financial statements along with the note disclosures.

Criteria:
Effective internal controls require competent accounting professionals who are knowledgeable and conversant with analyzing, processing, recording and reporting financial data and information.

Cause:
The departure of both the Agency Fiscal Officer and the Accounting Officer during the fiscal year resulted in the loss of senior level personnel with the financial reporting experience and knowledge that was necessary to prepare the financial statements.

Effect:
Management was unable to meet its responsibility to prepare the financial statements. There is an increased risk that the financial statements will not be accurate, complete or free of material misstatements.

Recommendation:
The agency should continue in its efforts to fill the vacancies with professionals who have the competency, experience and capability to properly manage its financial accounting and reporting processes. In addition, cross-training of the Agency's personnel in the financial and accounting processes could mitigate some of the financial reporting risks associated with unanticipated separations of personnel.

Management's Response:
The DC Lottery accounting personnel did not possess the necessary documentation and back-up data to effectively perform the required tasks in a timely manner. Management is now ensuring that cross training is occurring when necessary and data is appropriately reviewed and distributed. The above situation combined with being short-staffed and the competing essential priorities of conducting our necessary business and analysis functions proved a difficult burden. DCLB will ensure that the finance division's staff will be appropriately trained and capable of fulfilling financial and accounting requirements in the future.
The Lottery agrees that vacancies should be filled and, in fact, has filled the position of Accounting Officer. The Lottery's new Agency Fiscal Officer is scheduled to begin his employment with DCLB shortly.

SCHEDULE OF AUDIT FINDINGS AND RESPONSES (Continued)
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Condition:
Our test-work of the licensing of new agents, bingo locations, charitable games, and suppliers revealed the following: Lack of supporting documentation: New Agents -Documentation such as the Retailer Bulletin No. 97.001, Taxpayer Identification letter from the IRS, Taxpayer Identification certificate for DC, and copy of the original lease were not available for review.
Charitable Games -Instances where files were missing copies of the following: (a) notarized application, (b) license, (c) proof of payment of license fee, (d) list of prizes, (e) proof of ownership of the prizes, surety bonds or confirmation letters from donors (f) list of members, (g) completed printer statement, (h) first and/or last tickets (for raffles) or sample ticket (for Monte Carlo nights), (i) valid Certificate of Good Standing from D.C. Consumer and Regulatory Affairs, (j) Constitution, Articles, Charter or Bylaws, (k) Certificate of Insurance/Rider, (l) Certificate of Occupancy, executed rental agreement, or letter of approval from Building Administrator (if event is on school ground), (m) IRS Tax Exempt notice or the DC Finance and Revenue Tax Exempt notice, (n) applying for multiple licenses for the same date for different events with only one application in the file, and (o) multiple organization names on documentation in one file without support for the different names.
Suppliers -Documentation such as Certificate of Good Standing from DCRA, DC Police Clearance Form for each owner and/or officer, Sales Tax License, evidence of Background processing by the Security Department, list of owners, Certified Price list of all products offered, and Bond document.
Insufficient Evidence of Supervisory Review and Approval of Licenses --New Agents' Licenses -Evidence of review and approval by the Supervisor prior to issuance of the license; -Charitable Games Licenses -Evidence of review and approval by the Supervisor prior to issuance of the license; -Bingo Locations Licenses -Evidence of review and approval by the Supervisor prior to issuance of the license; -Suppliers' Licenses -Evidence of review and approval by the Supervisor prior to issuance of the license.

SCHEDULE OF AUDIT FINDINGS AND RESPONSES (Continued)
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Criteria:
Per DC Lottery's Procedures and Application Checklists in order for a new or renewal license to be issued to an agent, bingo location, organization for a charitable game, or a supplier, the agency is required to obtain the approval of the Supervisor, as well as obtaining/maintaining the following documents:

Cause:
The exceptions resulted because of the agency's focus on the Sales side of the business which led to some shortcomings in the other areas.

Effect:
There is an increased risk that agents, bingo locations, organizations hosting charitable games or suppliers who do not meet the minimum DC Lottery licensing requirements are licensed to operate within the District.

Recommendation:
The agency should ensure that the required documentation is obtained and maintained within files of the agent, bingo location, organizations hosting a charitable game, or supplier. The agency should also ensure that all documents are properly reviewed and approved prior to issuing a license.

Management's
Response: The Lottery acknowledges the exceptions identified during the testing of the new agents' licenses, bingo location licenses, charitable games licenses and supplier licenses and understands the importance of maintaining these records with the highest level of accuracy. To correct and eliminate these problems, the agency will modify its operating methodology within the Licensing and Charitable Games Division. Further, the division will modify its control documents specifying the information required for license approval which must be present in the license file folder.
The Lottery is in the process of obtaining all missing documentation. We do not believe any entities or charitable organizations were improperly approved.